Agent authority in contract variation

The question

When a principal appoints an agent to manage a supply contract on its behalf, how will the court determine the agent's authority to vary the contract, including contract terms dealing with variation.

The key takeaway

Regardless of existing formalities in the contract, an agent's actions may bind its principal to a variation of contractual terms, through its specific or apparent authority to do so.

The background

Advanced Multi-Technology for Medical Industry (trading as Hitex) was a medical supplies manufacturer located in Jordan. During the peak of the Covid-19 pandemic, Hitex entered into a contract (the Supply Contract) with Uniserve Ltd (Uniserve), a logistics supply company, to supply 80 million face masks.

Uniserve appointed Maxitrac Limited (Maxitrac), to manage the Supply Contract. According to Uniserve, Maxitrac was managing the production of masks and the relationship with the factory. Dr Stead was the sole director and shareholder of Maxitrac.

Hitex failed to meet the original delivery schedule. Maxitrac (through Dr Stead) agreed a variation to the original delivery schedule in a revised schedule, which Hitex subsequently met. Hitex claimed that Dr Stead had authority to agree a revised schedule with Hitex, and that an exchange of emails between Dr Stead and Mr Khader (of Hitex) on various dates had this effect.  In contrast, Uniserve argued that:

• the exchange did not create a variation to the delivery dates agreed in the Supply Contract
• Maxitrac/Dr Stead had no authority to agree a variation; and
• the revised schedule was not valid because it did not comply with the formalities for a contract variation

Uniserve's claimed that it terminated the Supply Contract, either in accordance with the Supply Contract or by common law, having accepted Hitex's alleged repudiatory breach in failing to deliver on time, in a contract where time of delivery was of the essence and it was clearly expressed to be a breach that was incapable of remedy.

The decision

Was the exchange "intended" to create a variation to the contract?

The court determined that, based on communications (emails and phone calls) between Hitex, Uniserve and Maxitrac, there were various indications that led towards the conclusion that the revised schedule was intended to replace the schedule for delivery set out in the Supply Contract. There were references in the exchange to an "agreed schedule", both parties acted as if this would have contractual effect, and Dr Stead and Mr Liddell (managing director of Uniserve) showed in communications between them (in which they discussed finding a way of abandoning the Supply Contract in place for a cheaper manufacturer), that they thought that this revised schedule bound them.

Did Dr Stead/Maxitrac have authority to agree a variation?

In separate communications between Dr Stead and Mr Liddell, it was clear that Maxitrac was Uniserve's agent or representative in some sense, but with no understanding between them that Maxitrac was Uniserve's agent, in the sense of a person with a general authority to create or alter legal relationships on behalf of Uniserve.

However, the court found that Dr Stead was given specific authority to vary the contract during a call with Uniserve's Mr Liddell. In this call, he was told to "get on with it" when discussing coming to an agreement with Hitex on the revised schedule, which Dr Stead construed as giving him the authority to agree an amended delivery schedule with Hitex. After the revised schedule was agreed, as described above, Dr Stead and Mr Liddell acted as if the revised schedule bound them, reinforcing the specific authority had been given.

The court also considered that Hitex had no reason to doubt that Maxitrac could not agree the variation as it was central to the discussions with Hitex for the whole duration and performance of the contract, and Hitex was entitled to assume Maxitrac had the power (by way of apparent authority) to agree the variation.

Was there a failure to comply with the formalities for a contract variation?

The Supply Contract contained provisions relating to formalities for amending the contract. Clause 17.2 in the General Terms and Conditions within the Supply Contract states that any:

"… variation to this Contract shall only be binding once it has been agreed in writing and signed by an authorised representative of both Parties."

Uniserve argued that this reference to an authorised representative referred to the parties identified in the order form which identified specific individuals and alternates as the "Uniserve Authorised Representative(s)" and the "Supplier's Authorised Representative(s)".

As this term was not capitalised, the court found that the meaning of "authorised representatives" in the contract should not be limited to the named "Uniserve Authorised Representative(s)" or "Supplier's Authorised Representative(s) in the order form." This meant that Maxitrac's emails could bind Uniserve to the revised schedule despite Dr Stead not being specifically mentioned in the order form.

Ultimately, the court found that the parties did agree to substitute the revised schedule for the original delivery schedule in the Supply Contract. In agreeing to this and not specifically reserving rights to claim for prior breach, Uniserve was found to have waived the breaches arising from Hitex' failures to meet the original contract.

Why is this important?

When using an agent, it is important to address the scope of an agent's authority and power to make decisions on behalf of the principal, both in the relevant agreements and in the agent's dealings with third parties. 

Any practical tips?

Ensure that the scope of an agent's authority is set out clearly in the agency agreement, between the principal and agent.  The scope of agent's authority should also be clearly provided to the other contracting party, whether in the contract or in writing.

Principals should also ensure agents are properly supervised and their commercial activities dealings are regularly reviewed.

If it is intended to use defined terms in a contract, use capitalised terms and definitions for clarity.  Also ensure consistency between agreements and order forms, statements of work, etc, including as to formalities and authority.   

Autumn 2024